On taxes.

Constructive Hints On Receipt Of Income

December 11, 1994|By Julian Block, Tribune Media Services.

When the Internal Revenue Service sends the forms for its annual reckoning, most individuals list their deductions and income on a "cash" basis. They deduct all their expenses in the year they actually pay them and report all income items in the year they actually receive them.

Cash-basis taxpayers are also subject to a "constructive receipt" rule. This rule requires them to declare as income amounts that, though not actually received, have beem credited to their account (interest on savings, to cite a common example), or made subject to their control or set aside for them.

For instance, you must count as income for the current taxable year a check you receive in the mail on Dec. 31, even though you receive it after banking hours and cannot cash it or deposit it to your account until Jan. 2, cautions Nancy Dunnan, author of "Dun & Bradstreet Guide To $Your Investments$: 1994" (Harper Collins, $17). Moreover, the IRS is unwilling to draw a distinction between the actual delivery of regular mail and the attempted delivery of certified mail. According to an IRS ruling, you constructively receive certified mail that arrives on Dec. 31 when you are not home to sign for the mail.

But an important point sometimes overlooked is that a revenue ruling is by no means the last word. It merely reflects the official IRS position on an issue and is not binding on the courts.

A case in point was the refusal of the Tax Court to rigidly apply the IRS guidelines on constructive receipt to Beatrice Davis. She was not home on the last day of 1974 when the Postal Service tried to deliver a letter sent certified mail, return receipt requested. By the time Beatrice arrived home to find notification of the office at which she could pick up the letter, the office had closed for the day.

When the office reopened on Jan. 2, she got some surprising news. Instead of an expected notice of a rent increase, the letter contained a $17,000 severance payment from an employer who had told her the several months' processing required for a severance payment meant the check would arrive well beyond 1974.

Along with her Form 1040 for 1974, Beatrice attached an explanation of why $17,000 that had been listed on her W-2 for 1974 was actually income reportable for 1975. But the IRS insisted the $17,000 moved her into a higher-than-expected bracket for 1974 because the employer had committed the money to her that year.

That argument failed to sway the Tax Court. It pointed out the payment must be made available without substantial limitations. "Implicit in availability is notice to the taxpayer that the funds are subject to his will and control." Such notice was lacking, the court noted, since Beatrice "had no expectation" the payment would arrive in 1974. The Tax Court saw no reason to apply the constructive receipt rule simply because Beatrice received notice of attempted delivery on Dec. 31, when she had "no inkling" the certified mail was her severance pay.